Monday, December 09, 2013
An Excellent BIS Article
1) Central banks are in control of the conditions through their efforts at monetary easing.
2) Low investment opportunities in emerging markets have led to a search for other opportunities.
3) The focus has shifted to corporate bond issuance, and in the Euro area this is a big change:
The credit environment has benefited large non-financial corporates more than banks domiciled in advanced economies. Struggling to regain markets' confidence during the past five years, these banks have consistently faced higher borrowing costs than non-financial corporates with a similar credit rating. While the cost gap narrowed more recently, especially in the United States, it continued to exert upward pressure on bank lending rates. This prompted large non-financial firms to resort directly to debt markets, thus spurring corporate bond issuance. As a result, markets eclipsed banks as a source of new credit to corporates in the euro area.4) The growth in corporates this year is mostly on the riskier side:
In the syndicated loan market, "leveraged" loans - granted to low-rated, highly leveraged borrowers - accounted for roughly 40% of new signings from July to November (Graph 3, centre panel). Remarkably, throughout most of 2013, this share was higher than during the pre-crisis period from 2005 to mid-2007. This was the result of both higher volumes of riskier loans (blue bars) and lower volumes in the safer part of the spectrum (red bars). In parallel, investors' drive towards high-yield credit resulted in a gradually falling share of those syndicated loans that feature creditor protection in the form of covenants (Graph 3, right-hand panel).5) BIS seemed a little startled by the sudden yen for rolling bonds (the company doesn't have to pay the interest - instead it can just issue new bonds), despite the 30% default rate experienced in recent history:
The trend towards riskier credit was fairly general. It spurred, for example, the market for payment-in-kind notes, which give the borrower an option to repay lenders by issuing additional debt. Investors' renewed interest in these instruments resulted in more than $9 billion of new issuance over the first three quarters of 2013, one third higher than the overall issuance volume in 2012.6) A sucker is born every minute, and PT Barnum's spiritual sons are working as European bankers and PE credit brokers:
Similarly, industry reports underscored the growing share of debt in funding private equity takeovers. In the United States, this share increased steadily after 2009 to reach two thirds in October 2013, a level similar to that in 2006-07. For their part, European banks took advantage of the borrower's market by stepping up issuance of subordinated debt, thus increasing the cushion that insulates their senior creditors from the fallout of potential future distress.This goes on and on, but the most important part comes at the end. The easy credit granted to large corporates in the markets is not extending to smaller businesses, who are paying a large comparative tariff. This does not bode well for expansion, and it indirectly explains why low growth persists in spite of historically extreme easy money policies.
It's hard to see why this would stop - both India and China have credit difficulties of their own. In China's case, the rolling loan policy toward large state-ish companies has produced an epic wave of repayment dates and amounts in 2014, and no one knows what will happen. Will the plugs start to be pulled? Or will local Chinese governments keep the life-support plugged in? Sooner or later it will end.
However, as soon as interest rates do rise, corporations with a lot of debt will face difficulties in controlling future cash flows. Letting this trend continue for too long will result in future investment losses. .
Saturday, December 07, 2013
Why You Think The Economy's So Bad
There are obvious constraints on growth and obvious constraints on saving, which makes it hard for the younger to accumulate savings, and even harder for the older. Getting much in the way of inflation with these income statistics is an impossibility - if prices rise, people are forced to consume less.
Only time can heal this - next year the YoY change will be better, and the five year change will rise to about the 5% level, which would be a big help.
Under such circumstances, the domestic consumption growth is aimed toward necessities and lower priced luxuries. The good news is that the US economy is producing more energy, always produces a lot of food, and gets a decent amount of income off the lower priced luxuries. The bad news is that increases in taxation have the capacity to knock the recovery off its rocker, as do mandates to consumers to purchase services they can't afford, which is just another name for "tax".
Wednesday, December 04, 2013
December Taper, If the Fed Is Still Sane.
Auto sales were very good yesterday - very good indeed:
Unemployment claims have been solidly out of the trouble zone for months. Manufacturing, business and credit surveys are very healthy. Theories about "shocks" and so forth don't stand up to the solid data showing that in fact, the economy is strong enough to weather negatives. Thus it is time to roll up the fire hoses and put them away.
All the economic data shows consolidation of trend and the forming of a new floor at a level above the current one. At this stage in the game, the economy the Fed has grown used to regarding as a failure-to-thrive toddler is now a somewhat porky pre-adolescent that needs to get its butt off the couch before it turns into an obese adolescent. Take away the potato chips, Fed Papa!
The rational question is not whether to taper, but whether to taper by 20 billion or 40 billion. I don't suppose the NY Fed could refrain from mass suicide over 40, though, so that's out.
There was a very good global harvest, and that's going to help the next six months. There is a good supply of oil, and that's going to help. Europe is sort of staggering onwards, and that's not going to hurt.
The Street is struggling to locate threatening-looking comets in the night sky to justify the fleets of Frito-Lay (brought to you by the Fed) trucks rolling through the streets of Manhattan, but even the comets are not cooperating.
I don't expect the Establishment jobs figure to be good this month, because Establishment showed a huge gap over Household last month, but with initial claims like this, no one can really claim that jobs are the scary monster under the bed:
Further, the reality is that Boomer retirements are going to continue. This is a very hard, hard reality, and it means that jobs will open up for the younger folks. That's a very hard, hard floor for Main Street expansion, and only Main Street expansion can possibly generate a solid, continuing recovery that rebuilds the jobs base. No amount of financial flummery ever does that.
At this stage, the Fed should be worrying about continuing expansion without distortion, and there they have a big problem - a problem that they evidently don't know how to address, given the last FOMC discussion. The theory about reserve fund interest rates was shot down aggressively by certain entities.
If the Fed doesn't take it off, the Fed is going to create a much larger problem toward the end of next year.
It's already almost too late. The Fed should have started the taper in September, and now it is running out of time to do it. They've already generated a bit of a problem, and the longer they wait the bigger it is going to get:
If this goes too much further, the risks of a top-heavy credit load start growing astronomically. And I don't want to talk about all the crappy commercial paper out there, and the subprime loans on the autos.
This isn't a problem now, because rates are so low. But if rates must rise ever, then a wise Fed needs to fire a few warning shots to prevent loans from growing too much:
When rates do rise, there's going to be pressure on non-financials if the Fed lets a Greenspan moment develop a la 1998-1999. The ability to carry those loans and fund further expansions must be preserved.
Monday, December 02, 2013
December Fed - Grinch or Santa?
The reason I think the Fed should taper is that if it doesn't do it in December, there is no possible justification for doing it next March. Thus I think the Street wisdom on this matter is less than wise.
There are two things the Fed has to fear - the auto expansion slowing and the housing expansion slowing. Interest rates have a lot to do with both, and Q3 data has been iffy for both. So the one thing the Fed cannot have is interest rates spiking in March, right? No sane Fed would want that. Compared to 2013, the FHA annual premium has already been instituted, so low-downpayment home purchases are quite constrained.
Therefore, the Fed should begin to taper in December, so it can see how interest rates develop and adjust into the spring. They were clearly arguing over that matter very seriously recently.
But will they do that? The holiday retail season is going to be constrained, because the FICA increase means people just don't have the money to spend:
The rolling six-month expansion in cash in non-jumbo checkings/savings is, inflation-adjusted, very low and it means that holiday sales won't be that good. Some increase, but not huge.It's a short sales season, taxes have been raised on the upper income brackets, and there just isn't that much spare cash lying around.
Nor will credit purchases bail them out, because the only people who like to pay those credit card rates are very, very stupid or like to hang out in clubs with whips and chains:
People have been spending money, but mostly on cars. And auto inventories are filling up, because purchases have fallen off a bit:
Ward's projection is for a good increase in November sales, so that may even things up a bit, but inventories indicate a slight downshift in production soon unless it blows out. I don't think it will blow out.
Mind you, there is nothing wrong with this economy. It's currently solid, but just solid at lower levels. I don't think the Fed will want to take the chance of further suppressing the housing market, which is not going to be great next year. And construction gains are there, but slipping already, because home sales are a bit constrained:
The Fed doesn't want a significant interest increase in that. Investor sales carried it this year, but all things have their natural end. Rising prices plus a constraint in sales plus higher mortgage rates would not produce a good sales trend next year:
It seems to me that everything I have posted here indicates that a rational Fed would taper a bit in December, because they have to try the waters. They cannot try the waters again next March - they would not have time to save it if they needed to do so.
But if auto sales and retail data are not above expectations, I suspect they won't.
Friday, November 15, 2013
I'm Alive, But Too Busy To Post
What happened is that I have been working on the precursors to diabetes for a couple of years (medically). To some extent I was doing this with SuperDoc, to some extent with PNat. PNat just does the helpful analysis that hints at where to look.
Anyway, I had gotten to the point where I could consistently roll myself in and out of diabetes (I wasn't going to experiment on other people this way), but it had nothing to do with all the things you read about in the standard medical literature. Doc concluded at one point that I must have some weird sort of cancer, and I pointed out to him that I was doing this more than 20 years ago, and no way could I be living if that were true.
So we met at the pass and then doc was so fascinated about how I had diabetes but didn't that I think he concluded I must be a super genius at managing blood sugars (he should have known better, but I guess the truth was too weird). Anyway, I told him that I could do this with other people. I knew this because I HAVE been doing it with other people rather consistently.
So he started having me work with newly diagnosed severe diabetics, and sure enough, I can roll them back to an extent. They still have something wrong with them, but they are technically not diabetics. Also their bloodwork turns miraculously beautiful and their organ function jumps way up. Including pancreatic function.
So then I figured out how to all the way reverse my condition. So then doc had me work with this guy in heart failure, and lalala, it appears that he is abruptly coming out of cardiomyopathy. So now we are trying to do the full rollback with patients to see if we can.
This is extremely complicated both procedurally and medically. It appears to be an approach that hasn't been taken before, and according to PNat, this is also implicated in the development of several other odd diseases, especially auto-immune.
So SuperDoc is running in aphasic excited circles, both of us are staying up all night reading, and if we hadn't made an agreement on Wednesday that we needed to sleep I wouldn't even be posting this.
At the very minimum it appears we may have some protocols for metabolic disease that will be hugely helpful to many patients.
So to cut a long story rather short, SuperDoc says we are setting up a clinic just to do this and research, so we can develop the whole thing. I have agreed to be part of it, because the protocol is individual for each patient.
This has to do with the ATP cycle. But then, what doesn't in a living organism?
Sunday, October 13, 2013
Famously Horrific IT Decisions
As late as the last week of September, officials were still changing features of the Web site, HealthCare.gov, and debating whether consumers should be required to register and create password-protected accounts before they could shop for health plans.And so, of course they decided that you should be able to get no info before giving the government all your info.
This one decision is the source of many of their problems, because at 60-70 million people need info on these plans. About one-third of the states set up their own exchanges, but they were supposed to follow the government specs.
On the face of it, my guess is that this was a political decision, because they didn't want people to see the true cost of the coverage. Also it would have allowed journalists and other people to analyze the cost of the subsidies (horrific). If you want to generate massive traffic on a website that is not designed for it, turning a 15 minute inquiry with one database inquiry into a 14-hour struggle with over a hundred db transactions is going to be successful. Many would not define that as success, but hey, spinsters have different standards.
The specs were issued late - very late. Some of the functions even on the state exchanges require calls to government info.
The capacity does not apparently exist to get this done on time, and it is the government which created this mess. You can file the paper applications, but then the people who process the paper applications have to enter them in the site that is pitifully inadequate. So if you are going to have to do that, you should do it early and send it directly to the government by mail that's going to give you a delivery confirmation receipt, which you will need to keep.
I have spent the last few weeks digging in the ACA dirt burrowing past the government-imposed data blackout, and I will be posting a series of articles for people who are forced into this mess.
The only thing that is going to save this process at all is that the insurance companies have set up their own websites with calculators, and here's a multi-state site. You can use ValuePenguin to find the list of plans in your area for many states as well as the base premiums, and it does contain a basic calculator so that you can figure about what your premium cost will be.
In the annals of government FAILURES, this one will be legendary.
Tuesday, October 08, 2013
Take a Moment To Laugh About It
Weren't we all supposed to be distributing the pension cyanide pills to escape the 212 degree atmospheric armageddon of climate collapse? It's so hard to get people to pay attention to your own private world ending these days!
Genocide by another name.GOP Has Not Forgotten -----seniors, the poor, the disabled, the sick, the vulnerable, vets, et al. They just want to eliminate them altogether because they are useless eaters. They only want to fund people who deserve to live and have a life.
2. Tell me about it. Where I live, the streets are strewn with the dead. nt
It's racism. No, REALLY.
Then there is the whole line of argument about whether dissident legislators should be rounded up for sedition and sent to camps or just executed for treason in the normal manner. Mind you, this furor is raging on DEMOCRATIC Underground.
Economic Treason: The definition of "treason" and could Republicans be guilty of this crime I think DU comes off rather well in response to this one, but some are doubling down. Domestic Republican Terrorism is a good example of such a reply. Then there's my personal favorite - Class Action Lawsuit!
Sedition! This is classic, too classic to excerpt. A taste-test at this buffet of delights:
13. They are forcing government shut down. nt
18 USC § 2384 - Seditious conspiracy
Current through Pub. L. 113-36. (See Public Laws for the current Congress.)
If two or more persons in any State or Territory, or in any place subject to the jurisdiction of the United States, conspire to overthrow, put down, or to destroy by force the Government of the United States, or to levy war against them, or to oppose by force the authority thereof, or by force to prevent, hinder, or delay to the execution of any law of the United States, or by force to seize, take, or possess any property of the United States contrary to the authority thereof, they shall each be fined under this title or imprisoned not more than twenty years, or both.
It's not as if the voices of reason aren't trying to fight back, but passions are high.
Democracy is fragile, isn't it? In 1397, at the time of the Revenge Parliament, Thomas Haxey incurred the wrath of Richard II for suggesting in a bill of complaints that His Majesty's household expenses should be curtailed, for which offense King Richard II had him tried and condemned to death for treason. Haxey survived his temerity; Richard II did not. Some brilliant ideas never die, it seems.
More than 600 years later, we are willing to sell our birthright for political pottage and, um, the executive is getting into a pissing match with Congress.
Friday, October 04, 2013
Cry For The Children!
Karen Buondonno, a drone researcher at the Federal Aviation Administration for 23 years, used to view her job as secure. That sense of safety has eroded, she said, a casualty of three furloughs since 2011. ...As opposed to the private sector, where everyone is guaranteed yearly raises, benefits, retirement, sick pay, and lifetime job security? But wait, there's more (H/T Small Dead Animals)
“It’s no job security,” said Lytle, who lives in Waukegan, Illinois, and took online classes and finished her bachelor’s of science degree in environmental management and policy earlier this year. She hasn’t been able to advance her career because of a dearth of openings, she said. “If you’re trying to do something, go into other fields, don’t go into a government agency, it’s not worth it.”
But lately, civil servants are more often castigated as overpaid bureaucrats. President Barack Obama sent a letter to federal workers on Tuesday lamenting that they have been treated as a "punching bag" and caught up in Congress's disagreements.Won't they have a shock when they find out what wages and benefits have done in the private sector? Median real household incomes in the private sector are falling hard, and government pay is bucking the trend for the nation. Even nominal median household incomes have only rebounded to about the GR highs (2008) (Sentier data):
Perhaps as a result, more and more dedicated civil servants are looking to leave government and find a job in the private sector.
"Most people I know are looking for new jobs," said one Defense Department employee who requested anonymity to speak openly.
Nor does this info depend on ideology - here's Ezra Klein on the topic.
It is not that I am happy that these people are experiencing worries and cash flow difficulties, but I am awed at the complete idiocy of what they are claiming - that the federal government will be deprived of their brilliance due to a desperate escape into the private sector in search of rising wages and long-term security.
There is a problem in DC, and what we are seeing here exemplifies it.
Thursday, September 26, 2013
Taper, No, No, No
So I have not had the energy to blog the very interesting back-and-forth between the Fed Heads, but the summary I've come up with is that those who truly want to taper this year are now arguing for a formalistic move at the next meeting (in other words, conceding that they've lost the argument), and many are completely opposed. Therefore there will be no real taper this year.
The reason why is pretty clear. By any real standard, the conditions that the Fed was trying to address with QE3 have only gotten worse, and although they are still predicting some sort of pickup in the second half, those arguing for a taper will have to wait until that appears before their arguments gain any traction.
It's hard indeed to look at this graph and argue that the economy is picking up speed. The green line, indexed to the right, is the best of the indicators - the YoY change in four-week moving average for initial claims. That is truly benign. However those aren't necessarily a good indicator until after a recession has begun, and that's what the Fed is trying to avert.
The quite-correlated blue and red series are YoY change in real final sales of domestic product and YoY change in full-time employment. Neither look optimistic at the moment, and since the change in full-time employment follows that blue line, the Fed wants to see the blue line at least stabilize for a few quarters before it tightens anything. The blue line is currently below the post-WWII recession line and it has been. Even if you argue for a new normal, they want to see that thing straighten out and stick for a bit before doing anything.
And then, it's obvious that housing is interest-rate sensitive, and there is little hope of that blue line straightening out if the housing recovery doesn't at least stay up to about current levels. Nothing about employment suggests that it is feeding a significant spending expansion into the economy at the moment that could overcome a rebound in mortgage rates.
Regarding the blue line, there's reason to worry. Here's another graph:
(Also see Table 11 in the current GDP release - note that -6.6% over the previous four quarters.)
I do watch these two indicators quite carefully for an upper-bound assessment of corporate spending inputs for the next year of economic projections. The top line (net cash flow with inventory valuation adjustment) measures the real flow of money rolling through corporate hands that could be reinvested. The bottom blue line is undistributed profits with both IVA and capital consumption adjustment.
Historically, sustained weakness in these measures tends to be highly predictive of domestic downturns, and even if everything else looks bad, if these two measures are still growing or cash flow is growing while undistributed profits are not, it generally flags a growth recession not a recession. If you look at the mid 90s growth recession period, you see these two growing and no recession emerged. But right now these two really don't look good.
You can often see recessions being born more than a year in advance using these two measures. Companies that are not making more money tend to start watching their bottom lines very carefully, and slow cuts in expenses have a ripple effect across the economy. The last two quarters have turned in some rough numbers, with the blue line now being about where it was in Q3 2009. You are not going to see a Fed tightening under these circs.
Tax policy has not helped. Raising capital gains rates is kind of suicidal in these conditions - you need to pump corporate investment, not restrain it.
Now, I do differ from most in believing that the natural trajectory this year was for consumer-side weakness to slowly increase through the year rather than decrease. I may be wrong of course, but nothing I know about how these things work tells me that we could hit the tax increase/sequester peak before late in the third quarter. Which is where we now are, and frankly when I browse around things look pretty slim. Not disastrous, but kind of grinding on the pavement.
The real question, therefore, is why we are not yet in a recession? I think it is not because of the Fed action, but because of the M_O_M fudge factor gained by much higher levels of personal current transfers (i.e. SS, Medicare, SSI, DI, SNAP, etc) feeding into a stability in consumer spending. One could also call this the Europeanization factor, because this is what the European economies have done. They can stay up at very low levels of growth for quite a while because there is much less sensitivity in consumer spending relating to employment. Small weaknesses in employment are smoothed out by the high proportion of consumer spending funded by the government.
There's a lot of stability to these payments, and so they fund a pretty steady stream of consumer spending:
As you can see, real personal incomes excluding personal current transfers have barely exceeded their pre-recession peak. If you adjusted for increased taxation, they would be about at their pre-recession peak. The very low interest rates currently are a detraction from personal incomes:
The downside of depending on the government welfare income stream to sustain PCE is that consumer spending becomes acutely sensitive to inflation.
There are significant arguments on the taper side, but the reality is that if the Fed ever agreed to QE3, which it did, it is clear that the QE arguments loom larger in their minds than the negative arguments, and it is not realistic to expect them to suddenly abandon this course.
In short, the Fed theme song for the next meeting is going to be this:
Wednesday, September 18, 2013
Asset Purchases Are Not On A Preset Course
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.I read this as no taper this year at all. Unless the administration succeeds in starting a war (the actual opponent is irrelevant; the administration just needs a war), the FOMC will wait to see how federal fiscal policy develops before deciding whether to increase asset purchases.
I believe the Fed may be discussing ways and means of buying assets but lending them back to the banks to serve as a hard collateral base. There's no technical reason why they could not do this, and they may have to do it if they continue their asset purchase program much longer, or increase it.
Depending on what Congress does, the Fed may increase its asset purchases next year.